Mkt eye on Budget move to cut fisc; bet on midcaps: Experts

Birla Sun Life AMC's Mahesh Patil says that the key aspect that the market will watch for in the Budget is the government’s plan to rein-in the fiscal deficit. The midcaps, he adds on CNBC-TV18, have started to look attractive on fundamentals, global liquidity and an expected ease in interest rates.

Birla Sun Life AMC's Mahesh Patil says that the key aspect that the market will watch for in the Budget is the government’s plan to rein-in the fiscal deficit. The midcaps, he adds on CNBC-TV18, have started to look attractive on fundamentals, global liquidity and an expected ease in interest rates.

Birla Sun Life AMC's Mahesh Patil says that the key aspect that the market will watch for in the Budget is the government’s plan to rein-in the fiscal deficit. The midcaps, he adds on CNBC-TV18, have started to look attractive on fundamentals, global liquidity and an expected ease in interest rates.

Sudarshan Sukhani, s2analytics.com says that the follow-through in the Nifty today is a relief rally and a change in trend. "The trend is still down and whatever the Nifty offers on the upside to short-term traders should be accepted. I do not think investors should carry long positions for tomorrow."

Below is the edited transcript of Mahesh Patil's analysis on CNBC-TV18

Q: Are you in the camp that believes that the market could still cough up a pre-Budget rally or do you think it is just going to be a sideways move till then?

A: We hoped there would be a decent rally in the market based on government initiatives and liquidity flows, but we’ve been forced to reverse that view as the increase in outflows from domestic funds have evened the effect of the USD 7-billion in FII flows till date.

While the broader market has not done much, rising only marginally, the breadth has collapsed. So the midcap index is down significantly and there are a lot of stocks have actually returned to levels seen at the beginning of the rally in September-October 2012. Though the markets are trying to look pretty attractive with the huge supply of paper in the recent past, the upside has been capped.

Going forward, we believe that the Budget would be pretty okay. I think the finance minister should be able to at least show a decent fiscal deficit. There will be lot of cuts in expenditure because the revenues offer very little leeway due to the slowdown in the broader economy.

However, there is some expectation that the market could hold at these levels. With the market expecting very little from the Budget, I don’t think investors should hope for a pre-Budget rally. The quarter has been satisfactory with corporate earnings offerinhg a few positive surprises and should be enough for the market to sustain at current levels.

Q: What is your opinion regarding market sentiment and retail participation at this point of time considering the sharp downside in the broader markets on a year-to-date basis?

A: The breadth has collapsed because a lot of money moved into large-cap stocks. With domestic selling in insurance companies, some midcaps not ceased to be attractive and posted a decent correction. I wouldn’t be too worried because it has brought valuations back to comfortable levels. Even redemptions in the domestic market should ease in the next two or three months. Investors could see some valuation support from some of these midcap stocks at these levels.

Q: Is this a good time to buy midcaps?

A: Typically, midcaps tend to do well when the markets bottom-out and at least on that count, the fear of a downside is removed. There is little expectation of a deeper correction taking into consideration the fundamentals and global liquidity. Any ease in interest rates will be a sweet spot for midcaps.

Given that these two conditions are still valid, I would presume that, from a medium-term perspective, if investors take a one-or-two year view, midcaps should do reasonably well even from these levels.

In the near-term, the money being invested is chasing the largecap stocks and there may not be any meaningful recovery in midcaps from a short-term perspective.

Q: How would you time the macros and the data such as the trade deficit for January which earlier today was at around USD 20 billion and the Central Statistics Office (CSO) estimating the growth rate at 5 percent, into the markets? Do you think most of the bad macros have been factored-in for FY13 and FY14 would possibly be better?

A: At the beginning of the year, we expected a slightly better recovery in the GDP growth rate and sharper interest rate cuts. But those things have belied a bit, especially in the last one month or so, looking at the data points. To that extent investors has to really calibrate down the expectations for FY14 in terms of earnings growth, but it is a marginal correction. Clearly things are definitely bottoming out and only the space of recovery as expected will probably be slow to that extent.

Current account still remains a challenge and there has been a slow down in terms of discretionary consumption which will actually start to affect imports, But we expect the current account to plateau and correct going forward.

Q: In your opinion what are the key aspects to watch out in the Budget to which the markets would react the most?

A: The most important aspect that the market will look out for is the tackling of the fiscal deficit and the target for FY14. The second aspect that the market will look out is the increase in taxes. The third factor is effort taken to boost investment. So if there is serious cut in Plan expenditure then that would be a bit negative in terms of revival of the economy.

Q: Tomorrow, the inflation data is to be announced. By how much do you think the markets will react if inflation is much higher than the street’s expectations?

A: Looking at the current mood of the market, if the inflation data disappoints then the market could take it a bit negatively. But beyond a point, it really does not matter. These are short-term blips and investors should look at the longer-term trend which we think is likely to go down in the near-term.